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Researcher Reveals How Supply Chain Companies Save on Audit Fees

Audit fees can be costly for many public and private companies, but a Rutgers University–Camden professor has discovered a way they save some money when going through the process.

By analyzing data from 2003 to 2009, Sungsoo Kim, a professor of accounting at the Rutgers School of Business–Camden, and his coauthors conclude that auditors offer reduced fees to clients within a supply chain, which is a network of associated organizations that work together to produce a product.

“It might be a small savings for smaller firm, but larger firms that pay millions in audit fees can potentially save significant dollar amounts,” he says. His co-authored paper on the topic, “The Effect of Supply Chain Knowledge Spillovers on Audit Pricing,” was accepted for publication in a forthcoming edition of the Journal of Management Accounting Research, an American Accounting Association journal.

In the paper, Kim writes that “an audit firm accumulates and develops…knowledge about its clients within a supply chain by also auditing suppliers or major buyers, which results in improved efficiency from knowledge spillovers enabling the audit firm to share cost savings with its supply chain clients.”

In other words, if an auto parts maker supplies an automobile manufacturer and they both have the same auditor, a savings can be realized. “There may be specific knowledge of the manufacturer’s proprietary purchasing system which can be transferred to the auto parts maker,” Kim says. “This ongoing knowledge can result in efficiencies in audit tests and both sides can benefit from a discount on an audit.”

According to his research, Kim says the discount generally is attributable to an auditor’s knowledge of the buyer within a supply chain and not its knowledge of the supplier, meaning there is a trickle-down effect.

“Audit fee discounts are due to knowledge spillovers, rather than a client’s bargaining effect,” Kim says. “The discount results from being a part of supply chain.”

Could there be drawbacks? Kim says that a significant audit discount could be associated with low audit quality, but it isn’t likely.

Kim, a Cherry Hill resident, received his bachelor’s degree in English from the Chung-ang University in Korea. He earned an MBA, a master’s degree in philosophy, and a doctoral degree in accounting from Bernard M. Baruch College, City University of New York.

Kim’s research regularly appears in such prominent scholarly journals and in 2010 the Accounting Research Journal awarded him with its Outstanding Paper Award for “The Effect of Enron, Andersen, and Sarbanes-Oxley on the US Market for Audit Services.” He served as president of the American Accounting Association’s Mid-Atlantic Region during 2012-13 and was as a recipient of the Fulbright Distinguished Lecture Award in 2011-12.

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